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Malaysian headline inflation slows in March, BNM likely to normalize monetary policy further

The headline inflation of Malaysia decelerated in March from February. On a sequential basis, consumer price inflation fell 0.3 percent in March, as compared with an unchanged reading in February. It was mainly driven by a 1.4 percent sequential fall in transport costs. Apart from a decline in average retail gasoline prices in the month, higher weights assigned to transport prices in the CPI basket have accentuated the fall in overall inflation. On a sequential basis, food prices dropped 0.5 percent in March after rising 0.2 percent in the prior month.

On a year-on-year basis, inflation decelerated to 1.3 percent in March from February’s 1.4 percent. For the first quarter of 2018, headline inflation averaged 1.8 percent year-on-year, as compared with the 4.1 percent recorded in the first quarter of last year. The slow rate of rise in inflation is because of favorable base; lower than expected rise in food prices; and a stronger Malaysian ringgit. The effect of the solid Malaysian ringgit is particularly seen in sub-components like clothing and footwear.

“We forecast full year 2018 headline inflation at 2.7 percent y/y with downside risks to the forecast given the Q1 2018 print and tepid improvements in core inflation”, said ANZ in a research report.

In spite of the ongoing rebounds in domestic demand, the rise in inflationary pressures is expected to be modest. The Malaysian central bank anticipates inflation to average between 2 percent to 3 percent this year after a 3.7 percent year-on-year rise last year. It also anticipates increased investment in capacity growth and rebound in labor productivity that should aid in curbing price pressures.

“We continue to believe that strong growth conditions will allow BNM to normalize monetary policy further. Accordingly, we expect BNM to raise the OPR by 25bps in September, taking the year-end policy rate to 3.50 percent”, added ANZ.

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